Retirement Plan Issues on the IRS’ Radar

The Internal Revenue Service has seen leadership changes, a number of employees retiring and a restriction in hiring, but it continues to have a focus on examination and enforcement efforts with retirement plans.

Mike Sanders, area manager for the Mid-Atlantic area, Employee Plans, Internal Revenue Service (IRS), warned attendees of the 44th Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Business at the University of South Carolina, and co-sponsored by PLANSPONSOR, about potential audit triggers. Examples of issues that may trigger an audit include:

  • A large number of separated participants who are not 100% vested;
  • High percentage of assets designated as “other” on Form 5500;
  • Significant distributions on income statements; and
  • Plan is top-heavy.

“Every line item on the Form 5500 is utilized,” Sanders summed up. He also warned that the IRS is in the process of training agents now to increase its efforts to examine cash balance plans, especially small cash balance plans.

Jalena Baumgardner, group manager, Employee Plans Examinations, IRS, explained that the agency often starts compliance projects based on issues it finds with plans. For example, right now there are compliance projects for employers that did not provide the benefit the plan requires; that filled out a Form 5500 when they should have filled out a Form 5500EZ; and that did not fill out sections on the Form 5500 related to assets transferred.

Baumgardner said if a plan sponsors gets a questionnaire from the IRS, it should not ignore the form: “Failure to respond will lead to an audit.”

She noted that a big issue the agency finds in audits is a failure to comply with the terms of plan for the definition of compensation. Many do not include bonuses when calculating compensation for contributions or testing, and sometimes plan sponsors make a plan amendment that changes the definition of compensation, but forget to inform their third-party administrators of the change.

According to Baumgardner, the IRS is beginning to look at hard-to-value assets, such as real estate, hedge funds, collectibles, etc. The agency is considering developing procedures for agents to use to examine plans with these types of assets.

She added that the agency is starting to find issues with document retention, especially for hardships and loans. This explains why it recently issued a reminder to plan sponsors about what records to keep for these transactions.